If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Wielton (WSE:WLT), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Wielton:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = zł39m ÷ (zł1.4b - zł661m) (Based on the trailing twelve months to September 2020).
Thus, Wielton has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.1%.
Above you can see how the current ROCE for Wielton compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Wielton's ROCE Trend?
When we looked at the ROCE trend at Wielton, we didn't gain much confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 4.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a separate but related note, it's important to know that Wielton has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In summary, we're somewhat concerned by Wielton's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 37% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you'd like to know about the risks facing Wielton, we've discovered 4 warning signs that you should be aware of.
While Wielton may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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